Thursday, July 29, 2010

Policy stuck in the doldrums? Consumers think so

Consumer confidence: that extremely coincident, but often cited as leading consumer spending, indicator of really just jobs growth during recovery has struck again, down near four points to 50.4 in July.

During the recovery phase of the business cycle, confidence is highly correlated with jobs growth. The chart below illustrates the recession and recovery path of consumer confidence since 1973. The 2007-2009 recovery in confidence - I mark the technical end of the recession at June 2009 but the exact month is not important- is tracking earlier "jobless recoveries": 1990-1991 and 2001.

The problem is, we can’t afford (economically, that is) a jobless recovery this time around!

Consumers are not feeling very good these days, with good reason! I like the way Dean Baker tersely puts it:
It is incredible that economists and economic reporters still focus on consumer confidence. Consumers are actually spending at a relatively high rate. (The savings rate is well below historic levels.) The problem is that they lost $8 trillion in housing wealth. The housing wealth effect on consumption is something that economists have known about for more than 60 years. It's too bad that they seem to have forgotten and so have the reporters who cover this issue.

The problem is not confidence. It is a lack of money.
That is why consumers are not spending more and will not anytime soon regardless of how happy they are.
Rebecca: In my view, it's (more precisely) the lack of money during the recovery of a balance sheet recession (Richard Koo of Nomura developed this idea). In order to lower household leverage (i.e., pay down debt burden) the easy way, a significant increase in nominal income is needed, wage growth. And a significant increase in wage growth only occurs when the demand for labor is rising...precipitously. Only then will workers have enough pricing power (in aggregate) to demand sufficient wage gains in order to deleverage the safe way (not through default).

Recently, economists have been testing the theory that structural unemployment is rising ( post here). In my view, focusing on structural unemployment is just a policy excuse. It gives policymakers a reason to mitigate the large(r) policy impetus that is needed. Bad idea.

Richard Koo argues that structural unemployment is not rising:
When the deficit hawks manage to remove the fiscal stimulus while the private sector is still deleveraging, the economy collapses and re-enters the deflationary spiral. That weakness, in turn, prompts another fiscal stimulus, only to see it removed again by the deficit hawks once the economy stabilises. This unfortunate cycle can go on for years if the experience of post-1990 Japan is any guide. The net result is that the economy remains in the doldrums for years, and many unemployed workers will never find jobs in what appears to be structural unemployment even though there is nothing structural about their predicament. Japan took 15 years to come out of its balance sheet recession because of this unfortunate cycle where the necessary medicine was applied only intermittently.
Rebecca: Although this may appear to be a normal jobless recovery, recoveries from which consumers have prospered in the past through debt accumulation, it's not. Jobs growth is key to the deleveraging cycle; and with forecasts of the unemployment rate in the 8%-10% range through 2012, still 7% in 2013, the prospect of sufficient private-sector income generation looks very gloomy.

Rebecca Wilder


  1. For the last 97 years monetary flows (MVt) have oscillated at matching lengths.  The upcoming downswing (contraction), can be compared the the upswing (expansion) in the 1st qtr 1981.  It portends a cliff dive.

  2. If this consumer is any indication, there are 3 big ticket items I would go out and buy today if I felt better about where the economy is headed. Being at Arizona ground zero has that affect on one (not taking into account the 1070 mess). Cabela's advertised 40 job openings and over 1000 people showed up to apply. Does that say something! Economists and the corresponding reporters need a serious reality check - a "happy" consumer is not dependable and has little bearing on the overall situation.

  3. here's the BLM article on the other major consumer sentiment index:

    <span><span>U.S. Michigan Consumer Sentiment Index Fell to 67.8</span></span> - Confidence among U.S. consumers fell in July to the lowest level since November, posing a threat to the biggest part of the economy.  The Thomson Reuters/University of Michigan final index of <span>consumer sentiment</span> declined to 67.8 this month from 76 in June. The preliminary measure was 66.5. Employment growth has been slow to take hold and lower home prices are depressing wealth. The lack of confidence may further restrain <span>consumer spending</span>, which accounts for 70 percent of the economy, and limit the pace of growth.

  4. If the last week is any indication, it appears that more leading economists are coming to the conclusion that a new set of large-scale public jobs stimulus and hiring programs are needed to create the conditions for any significant private sector job growth.

    Alan S. Blinder, former Fed vice chairman, was asked (by me) on a conference call with reporters whether he thought such public jobs stimulus programs, including large-scale WPA-type programs, are needed now to kick start private sector hiring, and Blinder responded "absolutely."  Similarly, today's (Sun. Aug 1) NYT business section has a piece by Robert Shiller advocating much the same.

  5. But, the private sector is still going to wait to see what effects will be from the med and tax bills on their bottom line. Massive public sector jobs aren't going to do much in the long run - just run up the massive debt we already have. Unless, of course, they are going to be permanent jobs - OMG!